New technologies are greeted with incredulity. It has always
been thus. It seems reactionary, but sometimes it is justified.
Just because a technology is better (on paper or in limited use)
than what it is supposed to replace doesn’t mean the time is
right.
No technology descends from a cloud, perfect and complete enough
to make costs of retooling obviously bearable. Adoption requires
resources — capital and time — and those must come at the expense
of some alternative use. Innovation unfolds over time in fits and
starts.
Imagine, for example, you are a farmer in 1905. Your teenage son
is all fired up about the great new thing, tractors that run by
internal combustion. He claims you should buy one. But it costs the
equivalent of five horses. Production of the tractors has a
sketchy history. There are no
replacement parts. It’s hard to get gasoline. The noise scares the
horses. Plus, your current system is working. It’s profitable. You
have no reason to change.
It took another 10 years before the case for switching was
easy.
It’s this way with cryptocurrency today. It’s still an
experiment — with impressive results, to be sure. But there are
plenty of persistent problems that make you realize that this stuff
is not ready for prime time, if by that you mean becoming a serious
and viable replacement technology for national currencies and
conventional payment systems, however problematic they are. By the
way, it doesn’t have to be all that, right now, to be an enormously
promising challenger to the status quo.
The Canards
Still, we have surely passed through the stage in which we were
seeking proof of concept. Or maybe not. I was in a public debate
last week in Las Vegas with my good friend Peter Schiff. This man is not a believer. And that’s
just fine. What bugged me most were his bad reasons for putting it
all down.
- This stuff has no intrinsic value, Schiff
says.
You can’t touch it. You can’t eat it. It’s not beautiful like
gold. It’s not super liquid like dollars. It’s just vaporware,
imaginary assets.
Here’s what frustrates me about this line of thinking. It seems
intuitively right, but it’s actually completely wrong. There has
been no such thing as economic value, anywhere in the world at any
time in the history of the world, that is not an extension of the
human mind’s willingness to value a thing or service. And each of
us values things differently. That is, there is no such thing as
intrinsic value. All value is subjective. That is
true whether you can touch the valued thing or not, whether it is
pretty or not, whether you personally value it or not. Even works
of art that “everyone agrees” are masterpieces are still subjected to markets for
valuations. The seeming priceless thing can become worthless and
the seemingly worthless thing can become highly valued, all
depending on the human mind.
The question to ask is “Why do people value this technology?”
The answer is the distributed ledger that allows the peer-to-peer
porting of immutable information packets, securely and without
censorship. That makes new things possible, such as private
money.
- The price of crypto is purely speculative,
Schiff says.
People are only buying because they think other people are
buying who are in turn betting it is going to go up in price. It’s
hard to dispute this one. Anyone who has followed these markets
knows they can be wild and seemingly irrational.
What’s difficult is to distinguish this feature of crypto from
the way financial markets work generally. There is no such thing as
a non-speculative price of a financial asset. For that matter,
there is no such thing as a purchase of anything that is not
speculative: every movie ticket, for example, is a bet that the
movie will be worth more than what you paid for it.
To be sure, we all have the habit of trying to find some basis
for a prevailing price based on some underlying objective factor.
We look at capitalization, consumer trends, marketing plans, and
detailed balance sheets, and we speak of things being overvalued or
undervalued. Guess what? These are mostly games we play.
A price is nothing more than a point of agreement between buyer and seller. The basis
for it is always a projection from the human mind to the thing
being traded. (By the way, that the price of gold is subject to
specutive swings has long been cited as a case against the gold
standard.)
- No one uses it as money, Schiff says.
People accept it but immediately convert it to dollars.
This is partly but not entirely true. You can watch a quarter of
a million real-time transactions take place in a
day. This is down from a year ago because crypto is subject to
velocity changes the same as any money.
In a place like Venezuela, people would far rather be paid in
crypto than the hyperinflationary bolivar. I personally know many
people whose total income is taken in crypto. And there are many
crypto debit and credit cards that make the transition from crypto
to fiat and back so easy that it feels like crypto is almost
working like money. It’s not a stretch anymore to imagine that this
could act like money in a mainstream world in the future.
- Blockchains have become inflationary, says
Schiff.
Anyone can fork a blockchain. Anyone can create a coin. But it is the
same with most other goods and services in an economy. Anyone can
cook a meal, but that doesn’t mean you should sell your restaurant
stocks. And let’s be precise in terms. Experiencing more options is
not the same thing as inflation.
You can argue that there is no reason for thousands of crypto
tokens. And I might not understand why the local grocery store
seems to have 200 brands of toothpaste. What matters is that we can
distinguish one from another. Every cryptoasset exists on its own
ledger (its own ecosystem), and this technology is outrageously
scrupulous in revealing ownership rights and audit trails.
I suspect the core of the confusion here, for Schiff and many
others, is that they think of crypto as a product, and are
evaluating the tokens as if they are stocks. But it is more
clarifying to see crypto in general not as a product but rather as a technology.
There are infinite ways to deploy it.
- The costs of mining are out of control, Schiff
says.
I am surprised that this self-described Austrian would make of
crypto the same criticism J.M. Keynes made of the gold standard in
1923. Keynes’s Tract on Monetary Reform ends
with the flourish that mining is a vast waste, and suggests we end
our dependence on this “barbarous relic.” He was wrong because he
failed to consider that (1) we don’t want costless money, and (2)
the social costs of fiat money have been immense.
Mining costs are necessary to secure the network. The technology
is known as “proof of work” and is based on hashing algorithms that
govern access to the ledger. The word “mining” is a metaphor, of
course, but it works rather like gold mining: the higher the price
of a crypto asset, the more incentive there is to mine. The
difficulty level adjusts based on how much power miners contribute
to confirming transactions. We might wish for another system, but
we are wise to do a comparative analysis. No monetary system is
without costs.
The technology behind cryptocurrency is new, and its
instantiation in real-time financial markets is still an
experiment. There is a very long way to go before it realizes its
promise. And, yes, there have been and will continue to be
outrageous fails like Mt. Gox and Bitconnect.
John Froelich, the inventor of the gas-powered tractor, thought
he had a great idea in 1892 when he took out a patent on his
machine. His company went belly up by 1895. The Waterloo Gasoline Engine Company
was no more. I imagine that many people at the time said what
Schiff says of crypto today: this thing has no future.
Jeffrey Tucker
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